Perched on an economic fault
line By The Mogambo Guru
The economic seismographs in the Fearsome
Mogambo Bunker (FMB) are all frantic and erratic,
their little recording pens scratching and
scritching, clicking and clacking back and forth
across the rolling paper.
One of them is
detecting tremors from the change in the holdings
of US government debt by foreign central banks, as
indicated by their accounts at the Fed. These guys
bought up, last week alone, a mighty, a mighty
US$22 billion worth!
If you are one of the
people who write me and ask things like, "Do you
realize you are an idiot?" (Answer: yes) and, "Why
are interest rates so low that only a freaking
idiot would be buying bonds that yielded less than
the rate of inflation?", then this, perhaps, is
part of the answer you are looking for; foreign
central banks are (for one) buying, buying, buying
government bonds and
increasing their ownership of
your future tax dollars, and providing a lot of
buying power to the bond markets, which makes bond
prices go up and the yields go down, down, down.
For example, from Bloomberg.com we learn
that the bond market is bad all over the place,
and "Every industry group except energy and
utilities posted negative returns this year. Bonds
of finance companies lost 20%; media bonds, 10.2%;
and real estate securities, 9.9%. High-yield,
high-risk bonds are off to their worst start ever.
Junk bonds have fallen an average 3.9% this year,
losing about $35 billion, according to data from
Merrill Lynch & Co indexes."
And one
of the sensitive Mogambo Economic Tremor Detectors
(METD) shows that the apparent slowdown in Total
Fed Credit for the past few months has now been
revealed as a mirage, and Federal Reserve Credit
has now ballooned another $6.1 billion last week,
handily taking the total to a new, all-time record
of $876.6 billion.
Even more staggeringly,
the Treasury Gross Public Debt expanded by over
$150 billion in March! Hell, it was up $60 billion
last week alone!
And not content to just
destroy the currency, they are up even weirder
stuff, and to show you the kind of weird things
that you will see a lot of from now on, Jon Nadler
at Kitco.com writes, "And now, for something
completely different: The birth of the 'BPT'. The
Bubble Protection Team. If anyone had (valid)
doubts that the 'Plunge Protection Team' either
existed at all, or was noticeable in certain
markets, welcome to the new reality of a revamped
Fed."
He says that according to the New
York Times, "The plan of Treasury Secretary
[Henry] Paulson to overhaul the financial system
includes a crucial proposal: it would officially
transform the Federal Reserve into a 'market
stability regulator' rather than merely a banker's
bank. The Fed is no longer just a regulatory
agency presiding over a narrow group of businesses
called banks. Rather, its mission increasingly is
to maintain macro confidence - confidence that the
entire financial system is functioning well as
part of the whole economy."
Wow! The Fed
deliberately created so much money and credit, for
so long, totally distorting the economy of the
United States and the world into a grotesque,
twisted, cancerous monstrosity so that the entire
financial system is choking to death on the poison
of unpayable debt loads, and now this same Federal
Reserve is going to get MORE powers to create MORE
weird distortions and more inflation in the money
supply and more inflation in consumer prices like
food? Yow! We are freaking doomed!
The
weird stuff at the Fed, the weird stuff at the
Treasury, and the weird Bear Stearns fiasco
becomes a little more suspicious, if that was even
possible, after reading, "Wall Street's Latest
Illusion" in Barron's. Andrew Bary explains, "Some
Wall Street titans have been able to book gains
from the declining value of their own debt."
If you are like me, you immediately
stopped stuffing a yummy burrito into your mouth
and intelligently asked, "Huh? Buh a baffa a uhki
n aoo uh o eh? A ee nuh grah?" Junior Mogambo
Rangers (JMRs) around the world, of course,
immediately knew that I was saying "Huh? Book a
profit on a decline in your own debt? What is this
crap?"
Obviously repelled by the way I am
spewing little bits of burrito and saliva all over
everything while I speak, Mr Bary explains, "When
a company's credit weakens and the yield on its
debt rises relative to risk-free Treasuries, the
debt becomes worth less to the holder. The
financial company, which is the debt issuer, then
takes a gain, because theoretically it could buy
back its debt below face value." Hahahaha!
So Bear Stearns, bankrupt as it is, would
had to have booked a taxable profit on the
collapse of their debt, on which taxes may be due?
Hahaha! No wonder everybody wanted them to be
bailed out! And with free slop available to
anybody who asks for it, from the Associated Press
we learn that the hogs are wallowing in the Fed
slop, as they are borrowing like crazy from "the
Federal Reserve's unprecedented emergency lending
program".
The Federal Reserve admits that
"that those firms averaged $38.1 billion in daily
borrowing over the past week from the new lending
program. That compared with $32.9 billion in the
previous week and $13.4 billion in the first week
the lending facility opened."
Junior
Mogambo Ranger (JMR) Paul H noted that the Fed is
going crazy in the Mortgage Backed Securities
arena, too, and "Over $51 billion with over $24
billion in MBS alone for the past 2 days", which
he figures over a work week (five days) would come
to "about $128 billion per week. That would make
it somewhere in the neighborhood of $6,400 billion
per year, if I am nice and give them a two-week
vacation! Yikes, that's $6 trillion per year!!!"
JMRs around the world note the use of
three exclamation points, which seems just about
right for such excesses!! Hell, I just used two of
them to comment on his comment, which ought to
show you how bad things are!
Richard Daughty
is general partner and COO for Smith Consultant
Group, serving the financial and medical
communities, and the editor of The Mogambo Guru
economic newsletter - an avocational exercise to
heap disrespect on those who desperately deserve
it.
(Republished with permission from
The Daily
Reckoning .
Copyright 2008, The Daily
Reckoning.)
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Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
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